medium · Private Equity advanced-lbo
In the context of 'Circular References' in an LBO model, how does PIK interest simplify the modeling process compared to cash-pay interest?
- It allows the analyst to ignore the tax shield created by deductible cash interest payments.
- It removes the need to build out a full Income Statement to reach Net Income each period.
- It does not create a circularity with the 'Cash Sweep' because it doesn't use cash.
- It prevents the balance sheet from ever balancing across the projection period.
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